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What is the trading and profit and loss account?

When someone sets up a business, they want to know if it is making a profit or a loss.  A business that is making a profit enables the owner to make plans, perhaps for expansion, etc. It also makes it easier to obtain a loan. It attracts potential investors in the business and would-be buyers if the owner wants to sell the business.

To compute a profit or loss, a special account known as the trading and profit and loss is drawn up. There are two sections to this account: the trading account, and the profit and loss account.

The trading account is where the gross profit is calculated. The items that usually appear in the trading account are opening and closing stocks, sales, and purchases. The gross profit results if sales exceed the cost of goods sold. It is a gross loss if the cost of goods sold is more than the sales.

The gross profit, after the deduction of the cost of goods sold, is brought down to the profit and loss account. Here, the gross profit is added with all other non-sales receipts such as discounts received, commissions earned, etc. The profit and loss account is where all the expenses are listed on the debit side against the gross profit. The difference between the totals of the two sides determines the profit or loss. Net profit is the excess of the gross profit and other receipts over the total of all the expenses. If the total of the expenses is more, the account will show a net loss.

Last Updated (Thursday, 07 October 2010 09:33)